DOCSLIB.ORG

Business Law International Business Law

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Business Law International Business Law BUSINESS LAW INTERNATIONAL Business Law International Vol 20 No 3 pp 191–304 ISSN 1467 632X September 2019 Making Executive Compensation Less Controversial: The Rise of Pay Ratios ECHJ Lokin Indian Public M&A: A Comprehensive Guide to the Key Concepts, Deal Structuring and Execution Considerations and Market Practice for an International Lawyer Nikhil Narayanan VOL 20 Multiparty Contractual Networks: New Tool for Global Entrepreneurship and Supply Chains William B Bierce NO 3 The Application of US Anti-Boycott Laws: From the Arab League to Ireland SEPTEMBER 2019 Richard L Shamos The State of Crowdfunding Regulation in the United States Noreen Weiss Case Comment: European Commission Fines Guess over Anti-competitive Agreements to Block Cross-Border Sales (Case AT.40428 – Guess) Nelson Jung Published by the Legal Practice Division of the International Bar Association 217 Indian Public M&A: A Comprehensive Guide to the Key Concepts, Deal Structuring and Execution Considerations and Market Practice for an International Lawyer Nikhil Narayanan* Introduction At first glance, the legal framework governing Indian public M&A transactions may appear to be similar to that in England and Wales. The company law foundation is similar, and a number of familiar English law concepts find place in the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 2011 (the ‘Takeover Regulations’). However, on closer examination, the Indian regulatory regime is very different to that in England and Wales in relation to matters such as delistings, minority squeeze-outs and the operation of the regulatory regime in practice. Contested deals have, until recently, been rare. Listed companies are, in many cases, subject to high levels of control by founding shareholders known as ‘promoters’, independent directors have historically not felt able or been willing to act as a meaningful counterpoint to executive management and the institutional investor base is not as organised as it is in England and Wales or the United States. * Nikhil Narayanan BCL (Oxon) (Radhakrishnan/Chevening Scholar), BA, LLB (Hons) and MBA (London Business School) (Merrill Lynch Scholar). 218 BUSINESS LAW INTERNATIONAL Vol 20 No 3 September 2019 However, this landscape is changing. A number of controlling shareholders are in a weakened position due to the insolvency or over-leveraged position of their groups and this loss of influence is spilling over to mainstream transactions. International private equity and hedge funds hold positions in a number of listed companies and are more assertive than the traditional shareholder base in India. Both of these factors played a role in the recent IHH/Fortis acquisition where there were a number of competing bids and where the board changed (to become more independent) in the midst of the deal. While it is too early to draw any longer-term conclusions from this deal, 2019 has seen an unsolicited bid for Mindtree Limited that is currently under way. These are encouraging signs for Indian public M&A. Against that backdrop, this article seeks to guide international counsel and clients seeking to undertake Indian public M&A deals through the regulatory landscape, drawing comparisons with corresponding concepts in England and Wales. Backdrop to the Indian public M&A environment Before considering the techniques to achieve public M&A transactions in India and the more detailed features of public M&A in India, it is worth pausing to consider some basic contextual issues. Regulatory architecture The Securities and Exchange Board of India (SEBI) regulates public takeovers in India through the Takeover Regulations and its views are critical. For structural questions, it is possible to consult SEBI through its ‘informal guidance scheme’, but this process takes longer and is less fluid than the consultation process with the Takeover Panel in England and Wales (and the query and the SEBI response are made public). Apart from SEBI’s views, as a result of litigation, certain aspects of the Takeover Regulation, particularly around concert party status and the meaning of ‘control’, have been subject to judicial determination. Promoter concept Founding shareholders in India are commonly referred to as promoters. There are different definitions of promoters under company law and under securities law, but both include the concept of ‘control’ of the relevant company (discussed further below). However, the definition under the INDIAN PUBLIC M&A 219 Companies Act 2013 (CA 2013) also includes a shadow directorship concept (which is no longer a feature of directorship itself under Indian law).1 CONSEQUENCES OF BEING A PROMOTER There are two aspects to the promoter concept of relevance in the public M&A context. First, promoter-controlled companies comprise the majority of listed companies in India. In contrast to England and Wales, where premium listed companies must have a relationship agreement with their controlling shareholder, there is no such requirement in India.2 This allows controlling shareholders to exert a greater degree of influence over listed companies in India. Second, any potential acquirer or investor in a public company will need to understand the possibility and the risk of being treated as a promoter. This is an issue that is of concern not just to strategic investors. Financial investors are also capable of being treated as promoters (although most such investors try not to be treated as such).3 In this regard, the issue is that unlike England and Wales, where the UK Listing Authority’s (UKLA) listing rules clearly define ‘controlling shareholders’ by reference to a 30 per cent threshold, there is no such clear- cut guidance in India. In practice, any holding over 20 per cent is likely to necessitate discussion as to promoter status with SEBI. If an investor is treated as a promoter, the main implications are disclosure- related as well as the investor being deemed to be a concert party of the other promoters in a takeover context. Promoters are also subject to lock-in 1 The historic definition of ‘director’ under the Companies Act 1956 was with reference to ‘any person occupying the position of director, by whatever name called’, a construction that imported the ‘shadow directorship’ concept into Indian company law. However, the CA 2013 defines director by reference to ‘a director appointed to the Board of a company’, a narrower definition. That said, the definition of promoter includes in limb (c) a person who ‘in accordance with whose advice, directions or instructions the Board of Directors of the Company is accustomed to act’. This is the classic shadow directorship test. 2 Although reg 4(2) of the SEBI (Listing Obligations and Disclosure Requirements) 2015 (the ‘Listing Regulations’) contains some general obligations on the listed company to protect minority shareholders from abusive actions by controlling shareholders and there are other obligations with regard to the equal treatment of shareholders, this is not a clear requirement for a relationship agreement and there is no direct equivalent to Listing Rule 6.5 and 9.2.2 of the UK Listing Authority’ Listing Rules, which necessitate a relationship agreement and establish a clear requirement that the listed company be independent. 3 Eg, in the IPO of Pratap Snacks Limited, an entity controlled by Sequoia has been listed a promoter and in relation to the offer of shares of CMS Info Systems Limited, Sion Investment Holdings Private Limited, an entity controlled by Baring Private Equity Asia, has been listed a promoter. 220 BUSINESS LAW INTERNATIONAL Vol 20 No 3 September 2019 requirements in an initial public offering (IPO). 4 Other residual provisions also apply under company law and various securities laws. Therefore, as a formal matter, the exposure created by being classified as a promoter would seem to be limited. However, in situations where there is a breach or an alleged breach of any securities or other laws, in practice, SEBI is perceived as being harsher on promoters. This explains why most financial investors (and indeed most shareholders other than the founding shareholder or their families) prefer not to be treated as promoters by SEBI. Shareholder control Despite the influence that promoters exert in practice, the legal and regulatory environment in India does confer some power on shareholders of public listed companies in India as various matters require shareholder approval but is wary of permitting any particular shareholder special rights. The main considerations in relation to ‘special rights’ are summarised below. INVESTOR PROTECTION RIGHTS IN PUBLIC LISTED COMPANIES Upon a listing of a company’s shares, SEBI will require most investor protection rights to fall away. Although SEBI’s views on this are evolving, it has accepted the survival of limited investor board nomination rights and has frowned on the survival of affirmative voting rights and transfer restrictions on shares (although there have been certain exceptional cases). Therefore, financial investors will need to manage their expectations as to what rights are permissible both in relation to any investor rights when they invest in public-listed companies as well as the survival of any pre-IPO rights that they may have negotiated. 4 Regulation 36 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009 provides for a promoter lock of three years to the extent of 20 per cent of the post- IPO share capital of the company and any promoter holdings in excess of this will be locked up for a one-year period. INDIAN PUBLIC M&A 221 DUAL CLASS SHARE STRUCTURES Although Indian company law permits shares with differential voting rights in certain circumstances,5 in the listed company context, shares with superior voting rights (which would provide control to founding shareholders) have until recently been restricted. However, SEBI approved the concept of shares with superior rights in the listed company context in a board meeting on 27 June 2019, subject to certain protections.
Load more

Recommended publications
  • Initial Public Offerings
    November 2017 Initial Public Offerings An Issuer’s Guide (US Edition) Contents INTRODUCTION 1 What Are the Potential Benefits of Conducting an IPO? 1 What Are the Potential Costs and Other Potential Downsides of Conducting an IPO? 1 Is Your Company Ready for an IPO? 2 GETTING READY 3 Are Changes Needed in the Company’s Capital Structure or Relationships with Its Key Stockholders or Other Related Parties? 3 What Is the Right Corporate Governance Structure for the Company Post-IPO? 5 Are the Company’s Existing Financial Statements Suitable? 6 Are the Company’s Pre-IPO Equity Awards Problematic? 6 How Should Investor Relations Be Handled? 7 Which Securities Exchange to List On? 8 OFFER STRUCTURE 9 Offer Size 9 Primary vs. Secondary Shares 9 Allocation—Institutional vs. Retail 9 KEY DOCUMENTS 11 Registration Statement 11 Form 8-A – Exchange Act Registration Statement 19 Underwriting Agreement 20 Lock-Up Agreements 21 Legal Opinions and Negative Assurance Letters 22 Comfort Letters 22 Engagement Letter with the Underwriters 23 KEY PARTIES 24 Issuer 24 Selling Stockholders 24 Management of the Issuer 24 Auditors 24 Underwriters 24 Legal Advisers 25 Other Parties 25 i Initial Public Offerings THE IPO PROCESS 26 Organizational or “Kick-Off” Meeting 26 The Due Diligence Review 26 Drafting Responsibility and Drafting Sessions 27 Filing with the SEC, FINRA, a Securities Exchange and the State Securities Commissions 27 SEC Review 29 Book-Building and Roadshow 30 Price Determination 30 Allocation and Settlement or Closing 31 Publicity Considerations
    [Show full text]
  • Global Trends in IPO Methods: Book Building Versus Auctions with Endogenous Entry$
    ARTICLE IN PRESS Journal of Financial Economics 78 (2005) 615–649 www.elsevier.com/locate/jfec Global trends in IPO methods: Book building versus auctions with endogenous entry$ Ann E. Shermanà Department of Finance, University of Notre Dame, Notre Dame, Indiana 46556, USA Received 2 July 2004; received in revised form 23 August 2004; accepted 7 September 2004 Available online 18 July 2005 Abstract The U.S. book-building method has become increasingly popular for initial public offerings (IPOs) worldwide over the last decade, whereas sealed-bid IPO auctions have been abandoned in nearly all of the many countries in which they have been tried. I model book building, discriminatory auctions, and uniform price auctions in an environment in which the number of investors and the accuracy of investors’ information are endogenous. Book building lets underwriters manage investor access to shares, allowing them to reduce risk for both issuers and investors and to control spending on information acquisition, thereby limiting either underpricing or aftermarket volatility. Because more control and less risk are beneficial to all issuers, the advantages of book building’s allocational flexibility could explain why global patterns of issuer choice are surprisingly consistent. My models also predict that offerings with higher expected underpricing have lower expected aftermarket volatility; that an auction open to large numbers of potential bidders is vulnerable to inaccurate pricing and to fluctuations in $I would like to thank Ravi Jagannathan, Sheridan Titman, Jay Ritter, Tim Loughran, Paul Schultz, Robert Battalio, Bill Wilhelm, Alexander Ljungqvist, Don Hausch, Larry Benveniste, David Goldreich, Sudipto Dasgupta, Ed Prescott, V.
    [Show full text]
  • Book Building Process: a Mechanism for Efficient Pricing in India
    International Journal of Trade, Economics and Finance, Vol. 3, No. 2, April 2012 Book Building Process: A Mechanism for Efficient Pricing in India Bedanta Bora, Anindita Adhikary, and Ajeya Jha relevant information. The major disadvantage of this method Abstract—The most significant reform in the Indian capital is that it was quite difficult for a lead manager to estimate the market is the introduction of issuing shares through the Book market clearing price. Moreover, if the issue was Building process that seeks efficient pricing. The paper under-priced it led to oversubscription resulting in huge attempts to examine the importance of Book-Building method refunding costs. While in case of over-pricing, the issue may in issuing shares in secondary market, estimate and compare immediate and long term performance of the issues made not be fully subscribed thus leading to hindering of the lead through Book-Building and Fixed Price method, examine the manager's future business. size of the companies that opted for Book-Building method, and The introduction of Book-Building as a tool to estimate the examine whether Book-Building method is less under-pricing issue price (determined by the forces of demand and supply) than Fixed Price method. The data and methodology adopted was recommended by Malegam Committee in 1995. here take the project through secondary review. To meet up However, it was in 1998 that SEBI formulated the rules for objectives of the study, four hypotheses are framed and tested for which T-test, Karl’s Coefficient of Correlation, Mean and issuing shares through Book-Building process.
    [Show full text]
  • Guide to Going Public Strategic Considerations Before, During and Post-IPO Contents
    Guide to going public Strategic considerations before, during and post-IPO Contents 1 | Guide to going public Foreword For private companies seeking to raise capital and capital-held companies considering their strategic options for funding for provide exits for their shareholders, an initial public growth, including a public listing. We have professionals with extensive, offering (IPO) can be a superior route and strategic proven experience with domestic and international capital markets. Our professionals have deep knowledge of your industry, which allows us to option to funding growth and to access deep pools of create interdisciplinary teams that will steer you onward, through and liquidity. While challenging markets will come and go, beyond your IPO and support your plans for growth. it’s the companies that are fully prepared that will We are confident this Guide to going public will give you an initial overview best be able to create value and fully leverage the and checklists of the key phases in going public from a global perspective. IPO windows of opportunity whenever they are open. It is based on EY insights from many IPO transactions, to help you begin Companies that have completed a your IPO value journey, so that you are well prepared to transform your successful IPO know the process private company into a successful public company that continually delivers The companies that involves the complete transformation value to its shareholders. With more than 30 years’ experience helping of the people, processes and culture companies prepare, grow and adapt to life as a public entity, we are well- are fully prepared will be of the organization from a private suited to take you on your IPO journey providing tailored support and enterprise to a public one.
    [Show full text]
  • NYSE IPO Guide Third Edition
    NYSE IPO Guide NYSE IPO Guide Third Edition www.nyse.com/ipo Publisher Timothy Dempsey Project Manager Chloe Tuck NYSE Editorial William Kantrowitz and Zachary Harvey Printing and Binding AGS NYSE IPO Guide, Third Edition, is published by Caxton Business & Legal, Inc. 27 North Wacker Drive, Suite 601 Chicago, IL 60606 Phone: +1 312 361 0821 Email: [email protected] Web: www.caxtoninc.com ISBN: 978-0-9964982-5-8 Copyright in individual sections rests with the co- publishers. No photocopying: copyright licenses do not apply. DISCLAIMER The NYSE IPO Guide, Third Edition (the “Guide”), contains summary information about legal and regulatory aspects of the IPO process and is current as of the date of its initial publication (April 2021). The Guide should not be relied upon as a substitute for specific legal or financial advice from a professional. Although efforts have been made to ensure that the information herein is correct, the Guide may contain errors or omissions, and the NYSE, the publishers, and the contributing authors disclaim any responsibility for, or duty to update or correct, any such errors or omissions. The views expressed in the Guide are those of the authors alone. Published by NYSE IPO Guide Third Edition www.nyse.com/ipo Preface 5 2.8 Anti-takeover protections 18 6.6 Market perception feedback 62 Simpson Thacher & Bartlett IHS Markit Stacey Cunningham President, NYSE Group 2.9 Incentive compensation 6.7 Investment community arrangements 19 database and CRM 62 Simpson Thacher & Bartlett IHS Markit Introduction: Advantages of listing on the NYSE 7 2.10 ​Managing third-party risk 22 6.8 ESG and the newly public IHS Markit company 64 IHS Markit NYSE 3.
    [Show full text]
  • (LCD): Leveraged Loan Primer Table of Contents
    Leveraged Commentary & Data (LCD): Leveraged Loan Primer Table of Contents Syndicated Loans: The Market and the Mechanics .................1 Loan Investors ............................................................................. 2 What Are Loans Used For? ......................................................... 3 Public Versus Private .................................................................. 5 Syndicating a Loan by Facility ................................................... 6 Pricing a Loan in the Primary Market ........................................ 6 European Investors ..................................................................... 7 Credit Risk ................................................................................... 8 Arrangers and Lender Titles ....................................................... 9 The Shapes, Sizes, and Formats of Loans .............................10 The Bank Book .......................................................................... 10 Covenants .................................................................................. 12 Types of Syndicated Loan Facilities ........................................ 14 Loan Pricing .............................................................................. 16 Fees ............................................................................................ 17 Asset-Based Lending ............................................................... 18 The Post-Launch Life of a Loan .............................................19 Secondary
    [Show full text]
  • The Persistence of IPO Book Building
    The Persistence of IPO Book Building Jason Premo Submitted to the Department of Economics of Amherst College in partial fulfillment of the requirements for the degree of Bachelor of Arts with honors Advised by Prof. Brian Baisa and Prof. Jun Ishii May 3, 2016 Acknowledgements I would like to thank Prof. Baisa for being my advisor through this process, and Prof. Ishii for providing the occasional much-needed tether to the ground. I would also like to thank Prof. Kingston for the comments and encouragement, and Prof. Reyes for leading the thesis seminar. I would like to thank Ali for getting the department to fund meals, and Molly for being my perennial computer lab companion. And last but certainly not least, thank you Tianzhou for always being present when you are needed most. 1 Abstract Many academics and public figures have suggested that book building, the dominant process for holding IPOs, be replaced by a more transparent process. In this paper, I model the IPO process as a game of incomplete information, in which firms of heterogeneous quality are given a choice between book building or holding an auction. In the event of an auction, investors are given a choice between gathering costly information or bidding uninformed. I show that book building has the potential to offer higher expected revenues to high quality firms by ensuring that all investors have access to information. By doing so, the underwriter is able to collect the information rents which would have been gathered by the informed bidders, which it then splits with the firm.
    [Show full text]
  • A Global Guide to Take-Private Transactions June 2020
    For further information or assistance with take-private transactions, please reach out to any of the contacts listed below or your usual Baker McKenzie contact. A GLOBAL GUIDE TO TAKE-PRIVATE TRANSACTIONS JUNE 2020 TRANSACTIONAL POWERHOUSE A GLOBAL GUIDE TO TAKE-PRIVATE TRANSACTION | 1 INTRODUCTION Recent falls in equity markets will mean that many listed companies may appear attractively priced, for a period at least. With significant levels of dry powder available to financial investors and potential delays to at least some private M&A processes, we expect the focus on “take- private” to increase during the next phase of the cycle. Take-private transactions are transactions where companies whose shares are publicly listed on one or more listing venues are acquired and de-listed. There are a number of reasons why we are likely to see a prevalence in take- private transactions over the coming months, including: • share prices of listed companies - particularly those in some of the worst affected sectors - have fallen significantly from their pre- Covid-19 highs; • the speed of any recovery in many economies is difficult to predict but there seems to be growing consensus that it will be slower than previously thought; • owners of private companies who may be contemplating a sale process will in many cases prefer to delay running such a process until market conditions improve, meaning fewer quality private company assets are likely to come to market in the short term and, in turn, prompting some acquirers to widen their focus to encompass
    [Show full text]
  • Direct Listing Vs. Traditional IPO Case Study
    University of Tennessee, Knoxville TRACE: Tennessee Research and Creative Exchange Supervised Undergraduate Student Research Chancellor’s Honors Program Projects and Creative Work 5-2020 Direct Listing vs. Traditional IPO Case Study Zachary V. Skaff University of Tennessee, Knoxville, [email protected] Follow this and additional works at: https://trace.tennessee.edu/utk_chanhonoproj Part of the Finance and Financial Management Commons Recommended Citation Skaff, Zachary V., "Direct Listing vs. Traditional IPO Case Study" (2020). Chancellor’s Honors Program Projects. https://trace.tennessee.edu/utk_chanhonoproj/2334 This Dissertation/Thesis is brought to you for free and open access by the Supervised Undergraduate Student Research and Creative Work at TRACE: Tennessee Research and Creative Exchange. It has been accepted for inclusion in Chancellor’s Honors Program Projects by an authorized administrator of TRACE: Tennessee Research and Creative Exchange. For more information, please contact [email protected]. 1 Direct Listing vs. Traditional IPO Case Study Zachary Skaff Advisor: Dr. Eric Kelley Chancellor’s Honors Program Thesis 2 Table of Contents: I. What is an IPO? II. Primary Offering vs. Secondary Offering III. Overview IV. Advantages / Disadvantages V. Traditional IPO Process VI. Direct Listing Process VII. SEC Regulation VIII. Google Process IX. Current Examples / Results of Direct Listings X. Works Cited XI. Appendices 3 What is an IPO? An initial public offering (IPO) refers the process by which a private company first issues its stocks in the form of a new offering to the public. This issuance gives companies the opportunity to raise capital from the public. The capital is typically used to pay off debt, fund the growth of the company, place the public’s attention on the company, or give current shareholders the opportunity to divest some or all of their shares in the company.
    [Show full text]
  • Effect of Book Building and Auctions on the Exit Choice Between IPO and Acquisition
    Theoretical Economics Letters, 2015, 5, 458-468 Published Online August 2015 in SciRes. http://www.scirp.org/journal/tel http://dx.doi.org/10.4236/tel.2015.54054 Effect of Book Building and Auctions on the Exit Choice between IPO and Acquisition Rohan Chinchwadkar, Rama Seth Indian Institute of Management Calcutta, Joka, India Email: [email protected] Received 10 June 2015; accepted 1 August 2015; published 4 August 2015 Copyright © 2015 by authors and Scientific Research Publishing Inc. This work is licensed under the Creative Commons Attribution International License (CC BY). http://creativecommons.org/licenses/by/4.0/ Abstract The choice of exit mechanism between IPOs and acquisitions is an important decision faced by en- trepreneurs and private equity investors. Although the decision to go public has been studied ex- tensively, a firm’s choice between IPO and acquisition remains relatively unexplored. In this paper, we extend the existing literature by studying the effect of the type of IPO process on the decision. We introduce the two IPO methods: book building and auctions, and show how the parameters of the IPO methods affect the choice between IPOs and acquisitions. We show that for both the IPO methods, the probability of choosing IPOs decrease when cost to investors for acquiring informa- tion increases and fixed entry cost for investors increases. In the case of book building, we show that the probability of choosing IPOs decreases when the number of informed investors in the road-show increases. In the case of auctions, we show that the probability of choosing IPOs de- creases when the certainty of the auction being successful decreases and the number of potential bidders increases.
    [Show full text]
  • The Initial Public Offering Handbook: a Guide for Entrepreneurs, Executives, Directors and Private Investors
    The Initial Public Offering Handbook: A Guide for Entrepreneurs, Executives, Directors and Private Investors Sonny Allison Chris Hall David McShea with Special Contributing Author Katherine VanYe and Contributing Authors from Perkins Coie LLP Merrill Corporation Copyright © 2008 by Perkins Coie LLP All rights reserved. No part of this handbook may be reproduced or transmitted in any form by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without prior written permission. DISCLAIMERS PLEASE READ THESE DISCLAIMERS: This handbook is intended to provide an infor- mational overview to nonlawyers and is not intended to provide legal advice as to any particular situation. The laws and regulations applicable to initial public offerings and public companies are complex and subject to frequent change. Experienced corporate and securities counsel should be consulted regarding the information covered in this handbook. The views expressed in this handbook are those of the authors only and do not necessarily reflect the views of Perkins Coie LLP or Merrill Corporation. IMPORTANT TAX INFORMATION: This communication is not intended or written by Perkins Coie LLP to be used, and cannot be used by the taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended, or to support the promotion or marketing of any entity, investment plan or arrangement. Merrill Corporation Publications Department One Merrill Circle St. Paul, Minnesota 55108 (651) 698-1865 ISBN 1-877927-59-7 Merrill Corporation products are designed to provide accurate and current informa- tion with regard to the subject matter covered.
    [Show full text]
  • Auction V. Bookbuilding 2-19
    View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by Research Papers in Economics Claremont Colleges working papers in economics Claremont Graduate University • Claremont Institute for Economic Policy Studies • Claremont McKenna College • Drucker Graduate School of Management • Harvey Mudd College • Lowe Institute • Pitzer College • Pomona College • Scripps College Issue Cost and Method of IPO Underwriting: Japan’s Change from Auction Method Pricing to Book Building Kenji Kutsuna Institute for Economic Research Osaka City University Sugimoto, Sumiyoshi, Osaka, 558-8585, Japan [email protected] Richard Smith Peter F. Drucker Graduate School of Management Claremont Graduate University Claremont, California 91711 [email protected] February 2001 Abstract In 1997, Japan introduced book building an alternative to an auction method of IPO pricing that had been required since 1989. Shortly after its authorization, all IPOs in Japan were priced by book building. The shift occurred despite economic arguments and evidence suggesting that the auction method reduced underpricing. We attribute the shift to creation of an information-based pooling equilibrium where low quality firms that benefit from the imposed auction regime lose the benefit if high quality firms are free to select book building. We examine the effects of the regime change on total issue cost and characteristics of IPO firms. We find that, on average, total issue cost during the auction period would have been similar under book building, but that the regimes have differential effects. For large well-established issuers, book building reduced total issue cost. Small issuers had lower cost under the auction method, but high-quality small firms appear to have been foreclosed from issuing.
    [Show full text]